Housing Finance in South Sudan

Introduction

The economy of South Sudan continues to suffer from effects of civil strife, particularly after the disintegration of the unity government in July 2016. A volatile political situation has since persisted, along with its own economic challenges. The country’s inflation rate hit 830 percent in 2016, eroding the purchasing power of capable consumers and business establishments. By June 2017, the inflation rate was still as high as 362 percent.

The exchange rate, another key macro-economic indicator, has been markedly volatile. The South Sudanese Pound (SSP) deteriorated from41 units against the US Dollar in 2016, to 125.92 units in July 2017[1]. This translated into further deterioration of the trade balance from an average deficit of US$166.7 million over the past decade to a low of US$229.5 million in March 2017 for a country, whose trade with key neighbours is highly asymmetrical. The price of cement, which is ALL imported from Uganda, Ethiopia, and Kenya has increased by 16 folds, from SSP 350 in 2016, to SSP 5670 in 2017[2], because of the scarcity of the US Dollar, and also the devaluation of the SSP. Additionally, foreign workers living in South Sudan, who would have contributed a significant percentage of business, have fled, leaving some businesses with very low sales and on the verge of closing shop.

Foreign-based commercial banks that offer housing finance products, including KCB Bank and Equity Bank have closed over 50 percent of their branches on account of declining business from both the private and public sector. Equity bank closed 7 of its 12 branches in South Sudan due to economic meltdown where the business was reportedly operating in tough conditions, recording net interest loss of US$5.5 million and a loss before tax of US$ 5.3 million[3]. The devaluation of the South Sudan Currency caused the bank to write off a loss of US$58.14 million. Eden commercial bank reported having extended housing loans amounting to US$ 6 million and only managed to recover US$ 2 million.

For retail deposits, civil servants salaries are seldom paid whereas oil sales revenue is “non-existent”. These two factors affect the disposal income of citizens, causing demand side deficits and also affect the capacity of commercial lenders to mobilize funds for asset creation in the housing sector.

The economic growth outlook is still uncertain, and largely dependent on continued period of relative political calmness. GDP is forecast to recover to 4.9 percent from minus 5.3 percent in 2016[4] owing to the stabilizing political and economic environment, however, closure of several bank branches continues to undermine funding to several sectors, including housing.

Access to Finance

Commercial banking accounts for the largest share of the financial sector (72 percent), with 22 licensed banks, sharing slightly above 300 000 bank accounts, however, representing just under 3 percent of the total population of the country. The financial sector in South Sudan stands out in the East African Region, for its low level of regulatory oversight, weak depositor protection legislation and low levels of client financial literacy. These factors explain, in part, the low level of banking products’ uptake in the economy. Private sector credit declined from an annual growth of 172.6 percent in 2016 to 46.9 percent in 2017, and projected to decline further to 28.5 percent in 2017.

On the credit side, the banking industry suffers from limited utilization of credit reference bureau due to a low coverage rate and an underdeveloped collateral registry, thereby restricting access to credit facilities. The financial sector has over the entire period of post-independence (2010+) been characterized by high interest spreads of up to 24 percent while most of the lending activity is concentrated in short-term lending, usually between 3 to 24 months.

Less than 8 percent of the entre loan portfolio is attributed to the real building and construction sector with banks preferring to lend to well-known and well established individual and institutional customers.Commercial bank lending is still less advanced with over 90 percent of the loans being short-term (less than a year, at interest rates of between eight and 10 percent)[1].

Medium term loans of one to five years, at interest rates of between 22 and 24 percent, constitute about four percent of the loans. Loans of over five years constitute the balance (one percent), and they are offered at interest rates of between 18 and 20 percent.

The main sectors extended commercial loans are (i) domestic trade, (ii) households, (iii) building and construction and (iv) real estate. The average loan size is estimated at about US$25000. A high down payment of up to 60 percent is required to reduce credit risk. The portfolio that has been directly invested in the residential housing and housing finance sector was estimated US$1.67million, by the end of Q1 of 2017. The number of housing finance loans generated from this portfolio was estimated at 789, in the same period. This represents LESS than 5% of individuals in formal employment. This clearly indicates that the breadth and depth of investments in the housing sector are low, and continue to recline due to ongoing economic turmoil and insecurity that has eroded investor confidence in South Sudan housing sector.

Additionally, the Government of South Sudan ordered all government institutions, including state-owned oil and mining companies, to end their business with commercial lenders and open new accounts with nation’s central bank, starting August 2016[2]. Whereas the order was intended to enhance efficient and effective public finance management and accountability also facilitate timely reporting to relevant government levels and international financial institutions, the directive actually depleted the deposit base for commercial banks, significantly impacting on their ability to extend loans. In effect, key lenders that were already suffering losses due to low business opted to close several branches in the country. By May 2017, Equity Bank had closed seven of its twelve branches in the country on the back of US$58 million loss suffered in 2016 due to currency political and economic factors. KCB Bank, the largest by asset base in the country also closed five of its nineteen branches by May 2017. The lender had lost US$34 million due to hyperinflation and currency devaluation in 2016.

The closure of branches has had a negative impact on access to finance in several states where these banking outlets where located. Additionally, several workers have been made redundant thereby exacerbating the poverty problem in this war-torn nation.

The insurance industry is nascent, comprising of ten companies, both private as well and partially government‐owned providers. The total premiums collected by the industry amount to about US$0.7 million and still unavailable to support mortgage lending in the country. The pension sector is a key driver of long-term funding for mortgage lending in many both developed and developing nations. However, South Sudan is lacking in this area. Whereas the country Pension Regulation was passed in 2013, very little has been done to establish and support pension schemes in the country. Deduction of civil servants pension contributions started late in September 2016 for workers at the national government level. This excludes workers at state level. In addition, the Military Pension Scheme, Organized Forces Scheme and Private sector schemes are yet to be established.

The microfinance sector is young, underdeveloped, and non-regulated, though monitored by the South Sudan Microfinance Development Facility, a joint initiative of the government, the Bank of South Sudan and the Multi-donor Trust Fund. A number of microfinance institutions (MFIs) operate in the country, as well as small savings and cooperatives/ rotating savings and credit associations (ROSCA’s). The largest MFIs by asset base are BRAC SS (a subsidiary of the Bangladeshi INGO), SUMI (the result of Greenfield investment funded by USAID), and FSL (funded by ARC International and Micro Africa Limited).MFIs still face huge operational challenges including high non-performing loans as a result of emigrations resulting from civil unrest, low levels of client financial literacy and business skills, all of which, collectively, drive up the cost of doing business  for MFIs.

Housing Affordability

The period 2016 to 2017 has been characterized by political turmoil and deteriorating economic conditions. A number of multinational corporations have closed shop and thousands of people fled the country.  This has negatively affected the housing affordability in South Sudan. Over one million refugees are now resident in northern Uganda refugee camps and sporadic fighting continues in South Sudan. Overall, more than 3 million people have fled their homes out of a population of about 12 million.

The cost of living has risen since 2016. Cost of food in the Central Equatoria state and across the nation increased by 334.90 percent in June 2017 over the same month in 2016. Overall, food inflation in South Sudan averaged 93.02 percent from 2008 until 2017[1], reaching an all-time high of 1 002.20 percent in October 2016, during the peak of the political upheaval. The United Nations Organization in Sudan has declared a famine in some parts of the country and nearly half the entire population face food shortages.

The high levels of poverty, have also severely constrained the levels of affordability. Households categorized as modest income earners, and would ideally have the potential to afford conventional housing finance products on the market, after relaxing the terms against which mortgages are offered, with a modest package of subsidies, earn significantly low (less than US$ 100) to warrant support. These households (which constitute over 70 percent of the population), instead, rely heavily on social housing projects to meet their housing needs. The average household income for the Region is a paltry US$ 100 per month.

Private developers have not been able to put up houses that can be afforded by the South Sudanese modest income earners (US$ 300 and 750). The few housing blocks by private investors mostly target middle to high income earners (above US$ 750 per month). The average cost of buying a 2 bedroom house in Juba is US$45 000. Renting a single room is US$2 000 per month on the lower end and up to 3 500 per month on the high end.

Housing Supply

The housing and housing finance sector in South Sudan has suffered massive slumps particularly after the outbreak of the Civil War in December 2013. Over 80 percent of the few housing projects (less than 20 in number) visible in the capital city Juba were initiated before the outbreak of the conflict. Planned affordable housing projects including the 475 housing units for civil servants, agreed between the Government of South Sudan and S & L Mortgages of Kenya Commercial Bank, and investments by private developers such as Luri River front Project, have never materialized.

In the absence government funded social housing projects, individuals, with support from Non-government organizations have, incrementally, built their own housing, using on own funds (individual savings) and small grants from NGOs (less than US$ 500). Housing units put up by individuals are usually substandard and not provided with basic services including hydro-electric power and metered water. Additionally, the units are built with cheap construction materials and in most cases, they tend to be temporary structures.

A significant number of residents in major cities including Juba are residing in these temporally structures at a going rate of US$ 25 per month for a single room. Further, land acquisition, particularly, the high cost of land leases, has hindered prospective investors from developing modest housing projects (between 20 and 50 units). An urban plot measuring 0.05 acres costs US$200 per annum. For a 49 year lease, this translates to US$9 800; compared to about US$4 000 for the same-sized free-hold plot in Uganda and Kigali.

On the funding side, closure of over fifteen branches of Equity Bank and KCB Bank, the two largest mortgage lenders has resulted into shortage of construction finance for the housing sector. The total loss US$ 700 million suffered by the two banks translates into an average of US$140 million of lost finance for the housing sector. Additionally, there has been a sharp decline in the supply of retail deposits to the banking industry, which would in turn be converted into medium term loans to finance housing developments.

In 2013, the government established the Housing Development Corporation with the objective of promoting housing development projects in the country. The corporation, along with the planned Housing Finance Bank, would establish a mortgage system to help citizens build concrete houses for themselves with financing stretching to 15 years for loan repayment. However, the initiative has not yet been implemented on account of government budgetary constraints and the inadequacy of skilled human capital.

Property Markets

South Sudan towns are awash with low cost, low quality housing structures mainly constructed for the poor and migrant low cost earners (earning below US$200). Apart from the grass thatched huts (Tukuls) that are traditionally constructed by South Sudanese homesteads, there are recent structures made of soft/ cheap iron sheets and timber that are mostly rented as homes by mostly foreign nationals. These iron sheet and timber structures provide housing as well as business premises for retail shops and warehousing facilities.

In terms of financing, the structures are raised mostly on rented plots of land in city or town suburbs. Usually a 40 x 40 feet plot is rented at US$1000 per year to a prospective developer. The developer then proceeds to procure cheap imported iron sheets and locally produced timber for the structures. The average cost of constructing a single room of 3 x 3 metres is US$150. The tenants of these iron sheet/timber structures are mostly foreign nationals who are not so permanently stationed. They are traders who averagely occupy these structures for 4 months and then move on.

The cost of renting these structures varies depending on the developer’s business model. Some developers rent the rooms out on a daily rate and others on monthly basis. The daily rates model mostly applies to structures built near markets, with the focus on the mobile traders especially those delivering items to markets and then head out of the city once they have sold their merchandise. A daily fee of US$3 is charged for this usually furnished room with a single bed, plastic seat and table. The monthly payment model targets low income (earning average US$ 150 – 200 per month) foreign nationals with some level of residence in South Sudan. These are usually market traders, hotel/restaurant attendants, construction labourers and the rest of the poor folks of society. The monthly charge averages US$30 depending on the nature of the suburb. With the monthly rental, no furnishing is provided. The tenant moves in with their household items.

Return on investment period on these iron sheet/timber housing homesteads depends largely on the land rental period and cost, the rental model and location. The developer with longer rental period and less cost, based in affluent suburbs enjoys more revenues due to higher rental fees compared to the one in mostly low income neighbourhoods. In areas like Hai Amarat, Kololo and Thongpiny that mostly house American and European diplomatic missions and residencies, Iron sheet structures litter the immediate neighbourhood to these modern day apartments. Here the monthly rental charges are higher at an average US$25 – 30 compared to areas like Konyokonyo, Jebel Kurjul, Munuki and Gudele that are mostly populated by low income earners and with modest housing structures. At these locations one can rent an iron sheet structure for US$ 10 – 20.

There is no standardized regulation on the quality of construction for these iron sheet shelters and developers are at will to raise them as they please. There is not requirement to consult with the constructions/engineering department for these kind of structures mostly referred to as “temporary”. Besides the Tukul, these structures are the mostly sought after accommodation in South Sudan hosting an estimated 2 million people majority of whom are low income foreign nationals.

Housing Policy and Regulations

In the past one year, there has been no new developments in the policy and regulatory environment governing South Sudan’s housing finance sector. Efforts to end the protracted conflict, have for two past consecutive years, forced the government to prioritize military spending, stifling resources to ministries, departments and agencies whose mandate is relevant to the development of the housing industry and housing finance sector. The country has several policies, strategies and regulatory frameworks[i] that espouse practical and feasible measures on how to adequately and sustainably develop the housing industry and housing finance sector.

The Ministry of Housing, Physical Planning and Environment continues to oversee housing developments in the country and also monitors compliance with established planning and building standards.The Land Act 2009 continues to govern land use management. Additionally, the government adopted the Land policy of South Sudan in 2013 to address issues pertaining to land acquisition and land management.

Housing Sector Opportunities

South Sudan offers several opportunities for all housing sector players, however, this will hinge on stability of the political economy.  There is a need to institute long-term finance schemes within the banking system if the lending culture of banks is to appreciate.  Clearly, the housing sector offers substantial opportunities, if affordability constraints are understood.

Given the affordability constraints, opportunities to grow the housing microfinance market are also suggested.  There is a need to facilitate and support the establishment of housing co-operatives in which individuals would obtain houses under conditions that suit their incomes.  The insurance, capital markets and social security sectors have not been tapped into.  These sectors are key in the provision of long-term funds to the mortgage industry.

Other opportunities include domestic manufacturing and supply of building materials (cement, iron, wood) and building urban sanitation services (solid and liquid waste management and sewer network system).